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Pimco, NY Fed Said to Seek BofA Repurchase of Mortgages

Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said.

A group of bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service loans properly, their lawyer said yesterday in a statement that didn’t name the firms. The New York Fed acquired mortgage debt through its 2008 rescues of Bear Stearns Cos. and American International Group Inc.

Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group, which has since expanded. Countrywide’s servicing failures, including insufficient record keeping, may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer at Gibbs & Bruns LLP.

“We now are in a position where we have to start a clock ticking,” Patrick, who is based in Houston, said today in a telephone interview.

If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide in default on its servicing contracts, Patrick said.

What’s Next

In its role as a mortgage seller, Countrywide should face more repurchase demands no matter what, Patrick said. The requests may come directly from bondholders or from the loan servicing arm of Countrywide itself or from Bank of New York, which acts as trustee.

Patrick represents investors who own at least 25 percent of so-called voting rights in the deals and stand to recover “many billions of dollars,” Patrick said.

MetLife Inc., the biggest U.S. life insurer, is part of the group Gibbs & Bruns is representing, said the people, who declined to be identified because the discussions aren’t public. TCW Group Inc., the manager of $110 billion in assets, expects to join BlackRock, the world’s largest money manager, and Pimco, which runs the biggest bond fund, in the group, the people said.

The investors are among those who want lenders to buy back home mortgages that they say were marketed with misstatements about quality. One problem can be faulty appraisals that overvalued homes. That matter is separate from an investigation by 50 state attorneys general into whether loan servicers may have improperly foreclosed on homes.

Most Common Claim

While failing to include documents needed for foreclosures violates so-called representations and warranties by mortgage sellers, it probably won’t be the most common issue discovered if investors can access loan files, Isaac Gradman, a San Francisco-based consultant, said yesterday.

“It’s surprising that it took this foreclosure crisis to bring the issue to people’s attention but people are starting to get it,” said Gradman, formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin. He represented mortgage insurer PMI Group Inc. in a settled lawsuit over similar issues against General Electric Co. and its defunct mortgage unit.

Countrywide hasn’t met its contractual obligations as a servicer also because it hasn’t asked for loan repurchases and is taking too long with foreclosures, Patrick said. The delays stem from missing documents, process mistakes and insufficient staffing to evaluate borrowers for loan modifications, she said.

Legal Action

If Countrywide doesn’t correct the servicing problems within a few months, her clients could have the right to pursue legal action against Bank of America, Bank of New York or both, she said. “None of the bondholders are opposed to modifications for deserving borrowers, but you’ve got to get it done” in a timely fashion, she added.

“The letter states a demand directed to Countrywide to cure the defaults,” said Kevin Heine, a spokesman for BNY Mellon. “It does not ask BNY Mellon to take any action. BNY Mellon will continue to perform its duties as trustee.”

Charlotte, North Carolina-based Bank of America will “defend our shareholders” by disputing any unjustified demands it buy back defective mortgages, Chief Executive Officer Brian T. Moynihan said today.

Most claims “don’t have the defects that people allege,” Moynihan said on Bloomberg Television, referring to so-called put-backs, in which guarantors or investors in mortgage-backed securities ask for the return of bad loans. “We end up restoring them, and they go back in the pools.”

Jeffrey V. Smith, a spokesman for the New York Fed, declined to comment.

Multiple Efforts

In August, Jack Gutt, another spokesman, said the institution was involved in “multiple efforts related to exercising our rights as investors,” which would “support our primary goal of maximizing the value of these portfolios on behalf of the American taxpayer.”

Mark Porterfield, a spokesman for Newport Beach, California-based Pimco; Brian Beades, a spokesman for New York- based BlackRock; and Peter Viles, a spokesman for Los Angeles- based TCW, declined to comment. John Calagna, a spokesman for New York-based MetLife, also declined to comment.

“We continue to review and assess the letter, and have a number of question about its content, including whether these investors have standing to bring these claims,” Bank of America Chief Financial Officer Charles H. Noski said today on a conference call with analysts. “We continue to believe the servicer is in compliance with the servicing obligations.”

115 Deals

The letter covered 115 separate mortgage securitizations, with $105 billion in original balances, from “eight investors purportedly owning interests in these transactions,” Noski said.

Banks’ costs from repurchasing mortgages in securities without government backing may total as much as $179.2 billion, Compass Point Research and Trading LLC analyst Chris Gamaitoni estimated in August, including expenses related to lawsuits against bond underwriters.

JPMorgan Chase & Co. analysts said in an Oct. 15 report the costs may reach $80 billion, reduced in part by the difficulty investors have getting trustees to act and a typical requirement that misstatements about loan quality must be “material.”

Losses on the mortgages packaged into bonds come amid “persistently high unemployment and other economic trends, diminishing the likelihood that any loan defect, should one exist at all, was the cause of the loan’s default,” Noski said.

Repurchase Requests

Bank of America said in an August securities filing it had been dealing with a “very limited” number of requests to repurchase bad loans out of securities other than from bond guarantors. Capital One Financial Corp. Chief Financial Officer Gary Perlin said on a conference call today it has “seen virtually no repurchase activity from” home loans it sold into uninsured bonds from 2005 through 2008.

Mortgage-bond contracts are explicit in requiring repurchases of loans when their quality fails to match sellers’ promises, said Scott Simon, Pimco’s head of mortgage bonds. The contracts also call for trustees and servicers to ask lenders to take back debt under those circumstances, he said.

“They’re contractually required to enforce the reps and warranties,” Simon said today in a telephone interview. He declined to comment on his firm’s actions.

Separate Effort

The initiative covered by the letter sent to Bank of America and BNY Mellon yesterday is separate from the effort coordinated through Dallas lawyer Talcott Franklin, Patrick said. That firm is coordinating action for a larger group of mortgage-bond investors holding more than $500 billion of the debt.

Participants in that so-called RMBS Investor Clearing House include BlackRock, Pimco, Fortress Investment Group LLC, Fannie Mae and Federal Home Loan Banks, people familiar with the matter said last month. MetLife isn’t part of that group, Calagna said.

Membership in the clearing house has risen to 110 from 65, during the last two weeks, said Bill Frey, head of Greenwich, Connecticut-based securities firm Greenwich Financial Services LLC. Frey this month lost a lawsuit against BofA seeking to force the bank to purchase any modified loans out of bonds.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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